When it comes to refinancing your commercial mortgage, first you want to know if you will qualify. Many factors will be reviewed to determine if you will qualify for a commercial property loan, including: property value, loan-to-value ratio, debt-service-coverage ratio, net worth, liquidity, and credit rating. If you are a good candidate for refinancing, your main goal will be to get the lowest rate and best terms possible.
In addition to getting the best rate possible, there are many other loan terms which you need to discuss upfront and that are equally important. Is the rate fixed or adjustable? Are you looking for a short-term loan or long-term permanent financing? It is important for a lender to understand your investment time horizon in order to provide the term that meets your needs. Are you looking for a recourse loan or a loan without a personal guarantee? If there are multiple investors involved, it might be best to try to secure a non-recourse loan. What are the fees and closing costs involved in closing? A lower rate might look attractive until you factor in the costs involved. Is your lender capable of closing your loan on the terms promised? Some commercial mortgage lenders do not deliver on their promises and change terms during the underwriting of your loan. Is your lender experienced with the type of property that you are looking to finance? You should choose a lender that specializes in the type of loan you are requesting. Does your lender charge a prepayment penalty and if so, how is a calculated? A low rate may hide an expensive penalty should you wish to prepay early. These are just some of the issues you should address with the lender you select at the time of application.
Here are some tips as to what lenders look for when they determine commercial mortgage rates:
- Property location – many lenders prefer large metropolitan or suburban areas and don’t consider loans in very rural areas. Loans in rural areas are often considered riskier for lenders as these properties are harder to rent.
- Good quality tenants – are the tenants national, credit-worthy tenants or local tenants without strong financials? Lenders like safe tenants who are guaranteed to pay rent, especially when considering single tenant properties.
- Are the tenants signed to long term leases or are the leases expiring shortly? Long term leases guarantee cash flow during the term of the loan.
- How is the historical occupancy and cash flow? Lenders like properties with constant positive cash flow and good occupancy history. Major fluctuations in cash flow cause concern for lenders.
- Has lease turnover been kept to a minimum? Again, low turnover suggests a property that is not hard to lease.
- Is the property in good condition or does it need repairs and/or renovation? A property in need of repairs could create a cash drain and affect the ability to pay the mortgage.
- What are the loan to value and debt service coverage ratios? Underwriters have guidelines which need to be addressed upfront.
- What is the credit rating of the borrower? We typically expect to see credit scores above 680.
- What is net worth of the borrower? Does the borrower have the ability to withstand a temporary setback? Lenders like to see a borrower with reserves.
- What is the borrower’s cash liquidity? Again, cash liquidity is important for necessary repairs or to cover a shortfall if a tenant leaves.
- Does the borrower have experience managing property? Real estate goes in cycles. Some markets are good and others require an experienced operator to survive successfully.
These are some of the questions that a lender will ask when reviewing a commercial mortgage loan application.
Another tip to getting the best rate and best terms is to consult a licensed and qualified commercial mortgage broker. A competent commercial mortgage broker who deals with many different types of lenders has an advantage over going to a local bank. Commercial mortgage brokers represent not only local banks, but agency lenders, national commercial banks, insurance companies, Wall Street CMBS lenders, credit unions, and private lenders. A wide choice of lenders will increase the likelihood of obtaining the best rates and terms available in the market.